By Sebastian Galiani. In collaboration with Santiago Afonso (Ministry of Finance) and Federico González Rouco (Office of the Chief of Ministerial Staff)

The discussion about the fiscal effort made by the government of Cambiemos tends to focus on indicators that hide the true magnitude of the fiscal inheritance received, and therefore obscure the achievements. The objective of this article is not to propose a definitive number of the fiscal effort, but to present different aspects that are not usually taken into account in the analysis and were relevant when defining the fiscal path adopted by the current administration. For this, it is necessary to separate from the observed fiscal balance accounting aspects and policy decisions that are beyond national government´s control, whether by legal imposition or economic inevitability. In fact, the methodological rigidity of public accounting standardized systems is usually one of the factors by which the analysis is limited and that resulted in the 2015 fiscal deficit being, in fact, underestimated.

Fiscal deficit

Analyzing the fiscal effort of the national administration only through its primary or financial balance is partial, since decisions taken by the National Executive Power (PEN, by its initials in spanish) can directly affect the fiscal results of the provinces. In a federal country like Argentina, fiscal decisions of the central government are directly related to those of provincial governments, especially so in a context of parliamentary minority.

During the first months of President Macri’s administration, long-standing conflicts between the nation and the provinces were resolved for the benefit of the latter. Progress was made in the return of 15% of the gross joint share assigned to cover the social security deficits between 2006 and 2015. It occurred immediately for three provinces as of the Supreme Court ruling a few days after the change of mandate in 2015, and it was implemented gradually for the rest, following an agreement between the National Government and the provincial governments. Between 2016 and 2018, funds equivalent to 1.6 points of GDP were transferred to the provinces, and once the refund is completed, the transfer will be equivalent to one point of GDP per year. A conflict over the origin of the funds that finance the AFIP was also solved, increasing the Nation’s participation in its financing. These funds, although they do not modify the Nation-Provinces consolidated fiscal result, have an impact on the composition of the disaggregated calculation – the revenues of the national government increased and the provincial public accounts deteriorated.

These resources assigned by the Nation to the provinces mean that part of the effort to reduce the deficit is expressed in an improvement in the fiscal results of the latter. Until 2015, the automatic transfers that the PEN made to the provincial accounts represented 40% of the tax collection (excluding income related to foreign trade and social security). Since 2016, PEN has been reducing discretion and begun to automatize transfers so that, by 2019, 50% of tax revenue will go directly to the provincial coffers. In 2018, 20 provinces will have improved their fiscal situation with respect to 2017. Half will have increased or started to have a surplus and 10 will have reduced their deficit. Last year only 4 provinces had total surplus.

So, to have a better idea of ​​the inherited fiscal deficit and the fiscal effort made, in Table I we present the consolidated Nation-Provinces financial deficit for 2015 and its projection for 2019:

Table 1:

Additionally, the base year deficit, the last of the Kirchner administration, is underestimated by different accounting aspects. During 2015, the national government “spent on account” without making the corresponding records in a number of programs. Such is the case of the Plan Gas, whose obligations were not recorded as due by the outgoing management, and were charged to the year 2016.

Some “below-the-line” expenses were also accounted for. This mechanism known as Priority Investment Projects (PIP), which began to be used in 2009, allowed certain projects and works to be treated as advances to suppliers until their completion, considering them financial assets. In this way, part of the expense that should be accounted for within the primary accounts was not accounted for and, therefore, the fiscal result improved. In 2015, PIPs accumulated 0.1% of GDP. As part of the agreement with the IMF, these projects were counted “on the line”. For 2018, for example, the primary result will incorporate expenses by 0.3 points of GDP from PIPs.

An important underestimation for the intertemporal comparison of the financial deficit goes through the interests of the debt in default. Each year elapsed with the debt in default there was an accrual of interest not recognized in the public accounts, until its accumulated registration as a greater debt. This, once bleached, began to impact explicitly on the budget. Taking into account these adjustments, in Table II (column 1) we recalculate the different deficits for 2015.

Table 2:

Note: Column 1 includes PIP expense, interest accrual on unrecognized debt and deferral of the 2015 Gas Plan expense. Column 2 is corrected for the excess of floating debt and, in the last , it is adjusted by the transitory income as a result of the withholding for the purchase of foreign currency.

Being an election year, the Kirchner administration took every available lever to advance expenses without paying for them. For example, it minimized funds that did not open up in the budget, such as those of Cammesa, which are used for the contingencies of the electricity system but which provide a certain buffer for public accounts. All this is reflected in the growth of floating debt in 2015, which climbed to 1.4% of GDP at the end of 2015. By 2018 it will end up being close to 0.6%. Although deficits are usually compared on a cash basis, this abnormality leads us in column 2 of Table II to estimate a hybrid deficit that incorporates the abnormal growth of the floating debt.

Finally, the State collected, during the validity of the capital controls, withholdings in the name of the income tax on purchases of foreign currency for savings or tourism purposes. These operated as a sort of compulsive debt with those who made those transactions. At the end of the capital controls, and given its legal weakness, the collection for these items was discontinued and the accumulated in the period 2012-2015 was returned during 2016. In the next column of Table II we estimate a version of the consolidated deficit that subtracts this transitory income. This estimate of the adjusted consolidated deficit shows a red of 8.1% of GDP in 2015.

Finally, we return to present the projections for 2019, which shows a decrease of the consolidated deficit of 4.7 points of the product in the four years of management of Cambiemos.

Fiscal Effort

The deficit incurred, whether in cash or accrual basis, in a given year, does not reflect the dynamics implicit in it. Many times, there are repressed situations that lead to greater future deficits. The typical case is that of pension systems. In our case, it applied even in the very short term.

The mobility law, whose modifications generated debate at the end of 2017, was very complex and difficult to analyze. It is understood then the little awareness that there is about the fiscal “passive” that hid the system. The old mobility indexed the largest component of total public spending due to past inflation, with a considerable temporary distance of between 9 and 21 months of lag. The disinflation of the economy of about 20 percentage points (which the Argentine economy must make with respect to the inflation of 2015 of 27%), would have caused, keeping everything else constant, an increase in social security spending of the order of 1.3% of GDP, only because of the existing lag in mobility. This effect was mitigated (although not eliminated) with the 2017 reform, without affecting (in the medium term) the benefits in real terms. In 2015, in addition, the ANSES faced a huge stock of lawsuits that, when accounted for, reached sums of macroeconomic magnitude, an issue that cannot be set aside because it is comparable to an unrecognized debt.

In addition, the de facto exchange split, although not formalized, allowed for an underestimation of interest payments in public accounts, since they were made at a lower exchange rate than the one transacted in the economy. If the debt services of 2015 had been paid at the 2016 real exchange rate, the interest expense would have been higher by 0.1 points of GDP. In fact, the unification of the exchange market led to a correction of the variables in nominal terms that increased the fiscal deficit. Not only this, but the jump in the interest account in relation to the GDP during 2018 is also closely linked to the devaluation of the peso during this year. In a scenario of stabilization and recovery, this process will revert significantly. The exchange correction also significantly affected the subsidy account.

None of the above takes into consideration that the simultaneous correction of the record imbalances in fiscal, exchange and tariff matters necessitated an essential reinforcement of social spending. Nor does it consider the need to reduce the record tax pressure left by the Kirchner administration.

Finally, we must bear in mind that the fiscal deficit always tends to be, keeping everything else constant, counter-cyclical. Clearly, a government that brings the fiscal deficit and the level of activity to unsustainable levels, generates a fiscal deficit lower than that of equilibrium. That was the situation in 2015.

In short, the fiscal effort made by the government of President Macri goes far beyond the reduction of the fiscal deficit in that it is not restricted to the direct improvement of the fiscal result of the national public sector, but also implies reorganizing the relationship between the different levels of government; rectifying proven injustices such as the trials that the provinces and retirees had with ANSES; recognizing distortions in a variety of relative prices, such as the exchange rate and public service rates; and, in addition, lowering the tax pressure. All of the above, taking into account the necessity of maintaining and strengthening the social safety net.

Conclusion

Beyond what one believes about the validity of each aspect discussed above, our analysis does not change significantly and the conclusion is robust -and opposed to what the simple follow-up of the primary fiscal result indicates of the national non-financial public sector. The fiscal effort made by the government of Cambiemos has been Herculean. That the space for action is so small, by virtue of the high participation of pension and social spending in the national budget (and therefore, quite inflexible) accounts for the will with which the task was faced.

The current fiscal policy is nothing more than a continuation of the original proposal, with the exception that it was adapted to the international context, which is more adverse for emerging economies. The central objectives of isolating the Argentine economy from the global vicissitudes, achieving the fiscal balance and consolidating a floating exchange rate still remain, although in the first case at a faster pace. However, when the whole period is analyzed, the fiscal effort will continue as it had been anticipated, equivalent to approximately 1.2 GDP points per year.